ECB holds key interest rate at historic low | Business| Economy and finance news from a German perspective | DW | 04.04.2013
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ECB holds key interest rate at historic low

The European Central Bank (ECB) has left its main interest rate unchanged at the historic low of 0.75 percent. The move was widely anticipated and comes as economists wait for the crisis in Cyprus to pan out.

The European Central Bank held its key interest rate at 0.75 percent for the ninth month in a row on Thursday, opting to wait and see whether the eurozone economy is on the path to stability or if recent signs of weakness are foretelling another recession.

"Weak economic activity has extended into the early part of the year, and a gradual recovery is projected for the second half of this year, subject to downside risks," ECB President Mario Draghi told a news conference in Frankfurt. "Against this overall background, our monetary policy stance will remain accommodative for as long as needed."

Draghi continued that the "downside risks" to recovery include weaker-than-expected domestic demand and slow or inadequate structural reform in the eurozone - code language for countries like Greece, Spain or Cyprus showing unwillingness to reduce their deficits and get their finances in order.

"These factors have the potential to dampen the improvement in confidence and thereby delay the recovery," Draghi said.

Draghi and some of his fellow policymakers have said the bank's priority is to use its key interest rate to harmonize the widly varying interest rates offered by banks across the 17 eurozone countries.

The 0.75 percent interest the ECB charges on loans is the lowest in the body's history, yet it is still the highest among the world's major central banks.

The ECB has been much less aggressive in its response to the global economic crisis than the central banks of Japan, the United States and the United Kingdom. They have all undertaken massive asset-purchasing programs and lowered their key interest rates closer to zero percent.

Crisis in Cyprus shakes confidence

Thursday's ECB meeting was the first since Cyprus was forced to accept an emergency loan package from the European Union and the International Monetary Fund. The most controversial condition for the bailout, an unprecedented tax on bank deposits, led to fears of a loss of confidence in eurozone banks.

The interest rate decision also follows two important economic indicators in Europe: inflation and unemployment. Figures released on Wednesday showed that inflation in the eurozone is well within the ECB's target range of just below 2 percent. Data on Tuesday showed unemployment across the currency union had hit a record high in February of 12 percent.

The 0.75 interest rate is what the ECB charges banks when they borrow money from it. The rate thus influences what those banks charge companies when they need to borrow money to expand production or hire more workers - actions needed for economic growth.

A cut to the interest rate could theoretically stimulate economic growth, but it also risks increasing inflation - something the eurozone could perhaps afford to do, but which on a larger scale would go against the ECB's stated mission of maintaining price stability.

acb/kms (AP, AFP, Reuters)